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Landlords: declare your tax now
A scheme set up to protect tenants’ deposits could be used to uncover underpaid tax
From The Sunday Times
May 13, 2007
Hundreds of thousands of amateur landlords are being urged to take advantage of the government’s tax amnesty after it emerged Revenue & Customs has a new tool at its disposal to identify property investors who have underpaid tax.
Accountants expect Revenue & Customs to use the tenancy deposit scheme, launched last month and compulsory for all landlords, to gather information on their names, addresses and rent and then cross-check it against their tax records.
Landlords who owe the Revenue money are therefore being urged to take advantage of the government’s offer of an amnesty, before the taxman comes knocking at their door.
John Baldwin at CCH Fee Protection, an accountancy specialist, said: “The tenancy deposit scheme provides the Revenue with the perfect tool to pursue landlords who have failed to pay enough tax. Landlords should double-check what they should be paying and, if necessary, take advantage of the tax amnesty to own up to any mistakes.”
Under the amnesty, launched last month, you have until June 22 to declare unpaid tax. It was expected to apply only to savers with bank accounts in offshore centres but at the last minute was extended to anyone with unpaid tax to declare, onshore or offshore. During the amnesty those coming forward will be charged a reduced penalty of 10%, compared with the usual 100%.
It is estimated that 700,000 landlords could be paying the wrong amount of tax but, until now, the Revenue has struggled to identify many of those at fault.
The tenancy deposit scheme could be a rich new vein of information. Accountants describe it as the “ultimate database” of buy-to-let investors.
Landlords have, since April 6, been required to sign up to the tenancy scheme when they take a deposit. It is designed to ensure tenants get their money back at the end of their letting period.
There are tough sanctions for landlords who don’t register in time and are caught: they will be forced to pay three times the deposit to the tenant.
The deposit scheme only applies to assured shorthold tenancies, but most rental agreements are of this type.
So far, thousands of landlords have registered with the schemes but over time more than 1m Britons who rent out property are expected to sign up, and in the process reveal details of their property investments.
Stephen Camm of Price Water-house Coopers, an accountant, said: “I don’t think pursuing landlords is top of the Revenue’s priorities now, but in three to four years time it could be.”
The Revenue could demand that the schemes reveal details of taxpayers about whom it has suspicions. Two of the schemes, Tenancy Deposit Solutions and the Deposit Protection Scheme, spell out this danger in their terms and conditions.
They say that “they may disclose details of your scheme activities to regulators, industry bodies and other organisations for the purposes of fraud prevention and money laundering prevention and where there are concerns over your activities”.
A spokeswoman for the schemes played down the fears, claiming this is a normal clause in terms and conditions. She said they did not intend to share data with the Revenue unless they were forced to do so.
Once the tax amnesty expires, accountants expect Revenue officials to crack down on people who get their tax bill wrong, even innocently. The first danger signal will be a payment order from the Revenue for tax due plus interest. A full-scale investigation into your tax affairs stretching back up to 20 years could follow as well as a 100% penalty.
Even if you have been declaring and paying tax, it is easy to make mistakes. There are different rules, depending on whether the Revenue regards a property as a buy-to-let or holiday home, and capital-gains tax regulations are notoriously complicated.
There is a CGT liability when you sell, but buy-to-lets benefit from non-business-asset taper relief, which reduces your bill. However, if your property is classed as a furnished holiday let you qualify for the more generous business-asset taper relief.
Rent is subject to income tax, but expenses can be deducted. If you rent out a room in your home the taxman will let you earn £4,250 in rent a year tax-free, but you must still declare it.
The tenancy deposit scheme adds more complication. Landlords must select a scheme within 14 days of receiving a deposit.
There are three to choose from. The first, the Deposit Protection Scheme, is a fee-free “custodial” scheme that looks after the deposit on your behalf; the other two, Tenancy Deposit Solutions and the Tenancy Deposit Scheme, are “insurance” plans where you keep the deposit yourself but pay a premium to the scheme to ensure it is paid out.
Nick Fellows, 45, from Wokingham, Berkshire, is an amateur landlord who has built up a portfolio of four properties with his wife, Emma.
He said: “It would be almost impossible to look after the properties, keep on top of my tax returns and hold down a full-time job without help from a letting agent. The tenancy deposit scheme is yet another complication that landlords are going to have to grapple with.”
He has not joined up yet because he has tenants in place, but he will have to do so at the end of his current contracts. He is not worried, though because his tax affairs are in order.
More details can be found at direct.gov.uk/tenancydeposit, or call 0845 609 0696. For information on the custodial scheme, go to depositprotection.com, and for details of the two insurance schemes, visit mydeposits.co.uk and thedisputeservice.co.uk .
YOUR GUIDE TO THE AMNESTY
The government has announced an unprecedented amnesty for taxpayers as it seeks to recover billions of pounds in unpaid tax. For the next month penalties for failing to declare and pay tax will be capped at 10%.
Although the scheme is aimed at about 3m people with offshore bank accounts, all taxpayers can take advantage.
How will the amnesty work?
Investors have until June 22 to register an intention with Revenue & Customs to declare any tax owed. You will still be penalised for failing to declare the income or gains you should have, but the maximum penalty will be capped at 10% of the tax you owe. Normally fines can be up to 100%.
There is no penalty if the income or gains you have failed to declare are less than £2,500, but you still need to disclose it and will have to pay the tax you owe plus interest, as usual.
How do I make a declaration?
The Revenue has set up a special disclosure facility for offshore bank account holders on its website, hmrc.gov.uk.
You cannot use this if you have undeclared income or gains from another source such as a buy-to-let or holiday home. Instead you should make a disclosure to your local tax office.
As long as you make a disclosure and payment within the deadlines you “can expect the same treatment” as offshore savers – in other words, the same reduced penalty.
What about making a payment?
You must make full payment of the tax owed, plus interest and penalties, by November 26 or the penalty may increase.
If you don’t expect to have the money in time you should call the Revenue on 0845 366 1202 as soon as possible.
I am considering whether I should make a disclosure. Is my domicile status relevant?
It may be. Your domicile can affect liability to pay UK tax on overseas income and gains.
If you are a British resident but not domiciled here, you usually pay UK tax only on offshore income and gains you bring or transfer to Britain. If the income arose in the Irish Republic, it may have to be declared.
You normally take on the domicile of your father, your domicile of origin. It is possible to acquire a new domicile of choice, but only if you have left Britain permanently.
I always declare the tax I owe. Do I have anything to worry about?
If you have declared the bank interest you earn through your self-assessment form and paid any tax due you should be fine.
If you receive a letter from your bank about the amnesty you can ignore it, although it is worth double-checking that you haven't made a mistake.
If you have unpaid tax for 2006-7, you still have time to declare it on the tax return due by January 31 next year. You can also amend your return for 2005-6 until January 31.
If you haven’t paid tax in previous years you will have to take part in the amnesty. Seek professional advice quickly.
What happens when the amnesty ends?
Revenue & Customs has vowed to “track people down” who don’t cooperate, threatening prosecution and a 100% penalty.